The lowest-risk, most secure way to a great retirement is to invest in blue-chip stocks. That's what I'll attempt to convince you of in the next three minutes, because I think the case is absolutely overwhelming, and it's where I'm putting my family's money.

One caveat before we get started: Blue chips are not the way to grab slam-dunk, overnight returns -- you won't be eating caviar and vacationing in Majorca by next week. But because they produce steadily rising payouts and are the most solid companies around, dividend-paying blue chips are the surest way to guarantee that you'll have income when you need it most.

A case for blue-chip dividends
My case for dividend-paying blue chips is based on their rock-solid stability. You know stalwarts like Wal-Mart (NYSE: WMT) are going to be alive and kicking in 20, 30, 40 years and more. Wal-Mart provides products that consumers will always need, has a redoubtable franchise, and continues to innovate aggressively. Better still, consumers have to do business with it in good times and bad, so it has minimal exposure to industrial cycles.

These types of companies have the security of broad-based revenue streams, high levels of investor confidence, and the access to financial markets that comes with such confidence. And all of that maturity and stability enables them to pay investors billions of dollars in dividends.

Not all dividends are equal, however, as the past few years have shown us. More than one formerly solid company had to cut dividends when the market tumbled -- think General Electric (NYSE: GE) and Dow Chemical (NYSE: DOW). Both are industrials that got stung by poor decisions in the midst of a downturn. GE Capital suffered heavily during the financial crisis and the dividend cut shored up the company's balance sheet, while Dow suffered from a decline in demand and its refusal to complete a takeover of a rival. But even these stalwarts maintained a portion of their dividend, and could increase their payouts as their situations improve.

You want to invest in blue chips that have proven they are committed to maintaining and increasing their payouts over time, and a company that survived this recession without slashing dividends is a pretty solid bet.

Such businesses will reward your trust over the long term, as they've rewarded countless investors before.

Grow toward the good life
And it's this component -- increasing dividends over time -- that will secure you an income for life so that you never have to rely on a stock's appreciating in order to afford a vacation or the life you want. With blue-chip dividend payers, you can create an income stream that's much better than those from typical annuities.

To give you an example, look at five high-quality companies that have treated investors to ever-increasing payouts:


Current Yield

5-Year Dividend Growth Rate




United Parcel Service (NYSE: UPS)



Exelon (NYSE: EXC)



PepsiCo (NYSE: PEP)



Magellan Midstream Partners (NYSE: MMP)



Already those yields beat almost any interest rate you could get from bank deposits. But the beauty of committed dividend payers is that their payouts go up over time without you having to reinvest those dividends. That last point is critical if you intend to live on your dividend income.

Each of these companies has a solid franchise and a history of increasing payouts. PepsiCo has enjoyed the strength of its drink and chip brands for decades, while Exelon has the stability afforded by an electric utility, since we'll always need its product. As one of the few premier shipping companies in the U.S., United Parcel enjoys significant barriers to entry into its high-fixed-cost business, meaning it's unlikely to face as much competition as it might otherwise. And Magellan pipes petroleum products into America's heartland through its extensive network, and like Exelon, helps provide the energy that is needed regardless of economic climate.

Simple works
The simplicity of this dividend strategy is amazing. If you buy the blue chips, especially ones focused around sustainable consumer brands, it's about as "set and forget it" as investing comes.

Consumer-focused brands are a great place to begin, but be cautious of businesses that are already facing significant headwinds, no matter how juicy their payouts.

Take Altria, for example, which sports a heady 6.7% yield and has historically been one of the most generous distributors of cash. Given the current government pressure against cigarette smoking, it's hard to imagine Altria in the same form in 20 or 30 years -- and that may affect its long-term ability to increase dividends at a nice clip.

Hitch your wagon to these stars
Dividend-increasing blue chips are a stable way to give yourself the income you need to thrive in retirement.

If you want more dividend stocks that could help give you the good life, regardless of the ups and downs of the stock market, consider joining Motley Fool Income Investor as our free guest for 30 days. The experts at Income Investor are focused on companies that offer a yield of 3% or better. But will those dividends last -- and will you get a bigger raise next year? Our experts provide skilled analysis on which dividends are sustainable, and which are likely to be increased. Just click here to get started.

This article was originally published on March 8, 2010. It has been updated.

Jim Royal, Ph.D. does not own shares in any company mentioned. Magellan Midstream, PepsiCo, and United Parcel Service are Income Investor selections. Exelon and Wal-Mart are Inside Value selections. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool has a disclosure policy.